Friday, March 25, 2011

Australia's banks have survived the financial crisis only to face a blunt message from the top of the Reserve Bank - the good times won't return, not like they were. Not now, not ever.

Assistant Governor (Financial System) Malcolm Edey told a conference on financial regulation in Sydney Australian banks were in good shape, and had emerged from the crisis profitable and well capitalised.

Despite complaints from banks about the rising cost their wholesale funding aired during the dispute over costs they are becoming less reliant on wholesale funds as their deposits grow faster than their loans.

They will nonetheless remain vunerable to sudden turns in sentiment in the wholesale market as they will have to replace government-guaranteed debt as it expires.

The bad news for the banks post-crisis is that "it seems unlikely we will be going back to the days of consistent double-digit credit growth we saw pre-crisis years".

"That growth was driven in part by factors that can't be repeated - the deregulation of the financial system in the 1980s, and the transition to low inflation in the 1990s," Dr Edey said.

"In the post-crisis environment borrowers and investors are more cautious than they were, both at home and abroad. That is likely to mean less demand for leverage and less growth in private balance sheets, even when the economy itself is growing strongly."

"If those trends continue, I think it will be good for financial stability, but it will also mean that our lending institutions have to get used to lower rates of expansion than were typical in the pre-crisis years"...
The statement is a warning to bank shareholders and directors not to expect a return to previous rates growth. If lending itself grows more slowly, any single institution can only return to the previously growth rate bycannibalising the business of another.

An industry-wide push for greater growth could endanger financial system stability.